What Brexit Could Mean For The EU

With British voters choosing in a referendum to leave the European Union, the other 27 member states of the bloc suddenly have good reason to worry they may lose one of the largest economies in their shared space. The impact could affect everything from the value of the euro to whether EU citizens will still be able to freely live and work in the United Kingdom. Here are four things to consider.

Impact On Euro

In the immediate aftermath of the Brexit announcement on June 24, both the British pound and the euro slid in value against the dollar. That reflected investor fears that a British exit from the EU could weaken the euro even though Britain is not part of the eurozone.

Economists say the first day’s reactions are more indicative of financial markets reacting to an unexpected situation than any guide to the longer term. And they are divided over whether a Brexit could eventually weaken or strengthen the euro.

“I expect the euro to be weaker, but by how much is difficult to predict,” says Kay Neufeld, an economist at the Center for Economics and Business Research in London. He says that Britons' vote of no confidence in the EU casts a negative light on its institutions, and he notes that membership referendums in other EU states could follow. If the momentum picks up, wary investors could move their money out of euros to other currencies such as the Swiss franc or the U.S. dollar, weakening the euro's exchange rate.

Alternately, some economists say a British departure might prompt the EU to re-invent itself as a tighter economic entity to dissuade other member states from following Britain’s lead. That would be something investors would find reassuring.

“It's possible that the EU will now push toward greater integration, more fiscal union, more transfers from richer northern countries to poorer southern countries,” says Richard Wellings of the Institute of Economic Affairs in London. “If that goes ahead, you could end up with the euro strengthened at least in the medium term."

Impact On EU Budget

One of the most contentious parts of the Brexit debate has been the question of how much Britain contributes to the EU’s budget and how much it could save by leaving. Pro-"leave" groups claim the country contributes 350 million pounds ($518 million) a week to Brussels and gets little in return.

But many EU experts say that figure is potentially misleading because the contribution is reduced by a rebate Britain has enjoyed since 1984 and is partly offset by direct EU grants to British institutions, particularly those engaged in scientific research.

The U.K. Statistics Authority reported in April that, after accounting for the rebate and grants, Britain contributed an average of 7.1 billion pounds ($10.5 billion) a year to the EU from 2010 to 2014. That is around 6 percent of the EU budget at that time.

The loss of EU budget funds would force the remaining EU member states to look for ways to make up that amount or go without.

“Now we are in a situation where you are taking a net contributor out of the system, so you will have to find a way of compensating for that. One way would be if other countries agree to pay a higher share,” says Fabian Zuleeg of the Brussels-based European Policy Center. “If not, the only other solution is some kind of haircut where you proportionally cut the amount of funding across programs.”

He says that if rich states like Germany did not come to the rescue, smaller countries like Poland and other new member states could be the first to suffer. They would see EU funding decline for programs meant to aid their economic development.

More generally, a British departure would throw trade ties among many EU member states into flux. The Global Counsel, a British think tank, says the states most affected would be Germany, the Netherlands, Ireland, and Cyprus. All have strong trade, investment, and financial links with the U.K. thanks to the EU’s principle of free movement of goods, capital, and people.

The most pressing question raised by a Brexit is what new trading framework Britain and the EU would adopt. One possibility is the model of Norway, which is not a member of the EU but has free trade with the bloc and follows EU commercial standards for its products. Oslo also contributes to the EU budget, but not as much as it would if Norway were a member state.

“A similar agreement could be found with the U.K.,” says Gregory Claeys, an EU expert at Bruegel, a Brussels think tank. He adds that this would mean the U.K. would pay less than it contributes to the EU today but also would cost London its voice in creating single market policy.

It is too early to predict whether the two sides would adopt any such arrangement. But some economists speculate that any new trade framework would likely be costly to southern EU states that export agricultural products to Britain.

“The United Kingdom is forced to buy agricultural products from southern Europe when it could buy them more cheaply elsewhere due to EU agricultural policies,” says Wellings. Anger over that issue has been a selling point for Brexit to British consumers.

Impact On EU Citizens Working In Britain

There are some 1.73 million citizens of other EU states now living in the United Kingdom and almost 80 percent of them are working there, according to British labor statistics. A big question if Britain leaves the EU is what will happen to them and to other EU nationals who might want to follow in their footsteps.

One argument put forth by proponents of Brexit has been to move Britain to a more restrictive immigration policy that insists new arrivals meet Britain’s needs for skilled labor. At the same time, proponents have urged tightening up on welfare entitlements that EU migrants now receive in Britain, including free access to health care.

A tightening-up of access to Britain’s labor market could directly affect countries like Poland, which has large numbers of its nationals currently working in the United Kingdom and sending back remittances.

Separately, a departure of Britain from the EU could mean that EU nationals would have to pay full tuition fees and have no access to student loans.